The guru’s recipe for growth
Friday, 2 March 2007
The guru’s recipe for growth
Professor Michael Porter of Harvard Business School used to charge $120,000 a day for his advice on competitive strategy. He is a guru in the field, which is management terminology for “how to grow your business”. I’m not sure what he charges these days.
Save your money; his message to people who want to grow is pretty simple. But it is worthwhile spending some time reviewing your business to see how you measure up according to his simple propositions.
He says that there are three ways of beating your competition and growing. They are:
- Having a niche market.
- Being a cost leader.
- Differentiation.
These days, niche markets are pretty hard to come by. Once upon a time, being the local printer discouraged anyone else from starting up business in the neighbourhood. These days, you can do most things in your home or on the web.
If you have thought out a way to protect a niche market other than by patent, then that’s great. Most people don’t and have to deal with one or both of the other two strategies.
Being a cost leader means that you can produce a product or service that may be similar to a competitor’s, but you can do it much more cheaply.
This gives you enormous advantages. For a start, if you are really effective at reducing the cost of production while maintaining or even improving quality, you can sell your product for less than your competitor’s production costs.
However, that is perhaps not the smartest strategy because price wars can be very destructive.
What cost leaders do is use their financial advantage to add value to their product by way of enhancements, added features or additional services. They can also outspend their competitors in the fields of advertising, marketing and research and development.
Some of the low-cost home loan businesses don’t carry the enormous overheads of banks and can have storefronts in your neighbourhood. They can meet the banks on interest rates and be profitable while offering add-ons such as credit cards at discounted rates.
Big boys such as Nokia have learnt the art of producing phones cost-competitively and are constantly ploughing money into development so that their latest offering is always a step ahead of their competitors’, who play catch up.
This cost leadership then helps a business to differentiate itself favourably from its competitors. Brumby’s, which is a chain that now has 300 stores in Australia and New Zealand, sells bread and pies and things. For goodness sake! How many business sell bread and pies and things?
It uses its cost-leadership to provide exceptional ambiance, which attracts people who want to have a quick meal. The standard of fittings and facilities puts it ahead of the pack. Brumby’s serves good food, and does it with style. Many people who have a choice would prefer to eat a pie and cake in the ambiance of Brumby’s than a Big Mac at a McDonald’s.
If Brumby’s had only ever sold pies and bread and things from a storefront in Ashburton in Victoria it might still be in business in that storefront, but it has been on the move ever since, using its cost-leadership to develop their differentiation.
So, Porter’s simple recipe for growth is to be able to produce something less expensively than your competitor and use the financial advantage to constantly improve on your offering.
There are some traps for people who convert this formula into a cost cutting exercise, but that is a story for another day.
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